What should you do when the market tanks?
Billionaire Warren Buffet told CNBC in 2016 that buying or selling in a rush may not be the best strategy. “If [worried investors are] trying to buy and sell stocks, and worry when they go down a little bit… and think they should maybe sell them when they go up, they're not going to have very good results." Such a panic move could unbalance your money and hurt your plans for a sustainable retirement.
Re-evaluate your risk tolerance, goals, and circumstances
Sometimes it takes a drop in our investments to recognize our tolerance for risk isn't what it used to be. This makes sense, especially as you move closer to retirement. Because now more than ever you understand that this large bucket of money you've been saving will be an integral part of supporting your daily needs in retirement. With this is mind, it's always important to revisit your goals and circumstances. At which point you can better size-up your investments to determine if they're in tune with your current needs, objectives, and concerns.
Avoid putting your money on the sidelines.
Should you ultimately determine a change would be in your favor, it's best to ensure your new strategy fits within the framework of your existing plan. For example, if you're going to get out of your aggressive growth stocks, consider a vehicle that still preserves healthy profit potential, but also adds downside protection to help create a safety net. This is smarter than a rushed panic-sell that places your proceeds into a "sideline" vehicle like cash or money market, which could cause you to miss out on big gains when the market corrects.
Consider Taking Advantage of Tax Laws
The silver lining to a down market is a strategy designed to generate tax losses so you can offset capital gains by selling an investment. Basically, if your losses are bigger than your gains, you can claim those losses on your tax return. You can even carry over losses greater than the amount you can claim on your annual return to another tax year. This strategy is referred to as tax-loss harvesting.
To quickly summarize...
- It's always a good idea to keep your goals and circumstances in mind before making a major change in a downturn.
- Resist the urge to put your money into sideline positions like cash or money market which could cause you to potentially miss out when the market bounces back.
- Consider harvesting losses so you can produce a more affordable tax bill.